Individuals working for a state or local government or a nonprofit are eligible for a 457 retirement plan as long as their employer offers it. In comparison to 401(k), 457 retirement plans are better in many cases.
Both plans have their fair share of similarities, though. Like 401(k), 457 retirement plans offer tax advantages where funding the account with pretax dollars makes them deferred. In other words, you pay taxes only when you withdraw money, not at the time of contributing.
This tax advantage makes 457 deferred compensation plans favorable for government employees and those working for some nonprofits. In a nutshell, 457 retirement plans are the same as 401(k) plans but with them being offered by a government agency or nonprofit. Additionally, some of the rules that apply to a 401(k) don’t apply to 457 retirement plans.
Advantages of 457 retirement plans
The most significant advantage of 457 plans over a 401(k) is that they don’t have an early withdrawal penalty. Sure enough, you’ll pay taxes on your withdrawals, but you won’t be subject to the 10 percent penalty as 457 plans don’t follow ERISA rules.
Other than these, many of the things that make a 401(k) apply to 457s, such as the contribution limits. The Internal Revenue Service has the same contribution limits to a 457. Throughout 2022, individuals can contribute up to $20,500 to their 457 retirement accounts.
While the contribution limits are the same, another favorable aspect of 457 plans makes them the better choice for many. Despite having access, not everyone has the means to contribute to an employer-sponsored retirement account. So, there are some lost years where an individual could have funded a retirement account but couldn’t or didn’t.
The 457 plans offer a double limit catch-up provision to compensate for this to those nearing retirement. Essentially, you get to contribute double the contribution limit. For example, an individual who’s nearing retirement can contribute up to $41,000 in 2022. This is another reason why many solely fund their 457, although numerous large government employers offer both 457 and 401(k).
If you’re maxing out your 457 but want to contribute to your retirement years even further, you can do so by also funding a 401(k).